Staff underpayment: How to get payroll right

By Zilla Efrat

If leading Australian companies like Woolworths, Commonwealth Bank, Super Retail Group and many others can’t get it right, one has to ask: why is payroll so difficult?

PwC estimates that Australian workers are underpaid by A$1.35 billion in entitlements each year, and that 13 per cent of the workforce is affected by the underpayments annually.

Emma Pritchard, executive counsel and senior team leader at Harmers Workplace Lawyers, believes payroll is difficult partly because of the complexity in the way wages and entitlements arise in Australia.

“For historical and constitutional reasons, employee entitlements can be found in legislation (both state and federal), in awards and enterprise agreements, in contracts of employment and sometimes even in the policies and practices of an individual employer or across an industry sector,” she says.

In assessing an employee’s entitlements, she says, employers often struggle to determine compliance with the relevant award, despite the Fair Work Commission replacing 1560 state and federal awards covering 93 industries and occupations with 122 modern awards in 2010.

Choosing the correct classification

“Still, finding the correct award from that list of 122 modern awards and then finding the correct classification within the relevant award for the individual employee can be difficult,” Pritchard says.

“Award coverage will vary, with the sometimes ambiguous nature of the work performed by the business and the role performed by the individual employee,” she explains.

Simon Hutchinson, product manager, payroll and compliance at accounting software provider Reckon, says that another reason payroll is difficult is because the rules around it change frequently.

“GST has remained largely unchanged since 2000. Payroll has had changes almost annually over the same period,” he says.

“Sometimes these are small changes, such as a reduction in income tax, but often it can be a significant change, such as the introduction of Single Touch Payroll or caps on termination payments. If you’re running a small business, it’s extremely difficult to keep up with all of this while trying to build up a client base.”

 

"Certainly, there is a degree of complexity in payroll, but it's not complex in a way that there's an excuse for not doing it right or for not paying the right amount of attention to it." 

 

Hutchinson says the main issue bigger companies face is that their employee base typically operates under the modern awards scheme.

“Instead of each individual employee having a separate wage or salary, how much an employee is paid is defined by their level of experience, age and the award amount,” he says.

“Modern awards can be quite complex to interpret, and generally require expert help from payroll specialists and up-to-date software.”

Small businesses can also fall under multiple awards depending on the industry they operate in, but Hutchinson says they aren’t as hampered. For example, many may have one or two awards that determine how their employees are paid, while larger organisations could have many more.

He adds, however, that often in a small business, the owner or someone who probably has no payroll experience is asked to interpret and implement complex rules and set-ups to pay employees. “You can see easily where problems can begin to occur.”

Simplifying payroll

Alex Haloulos, regional sales director at Sage Software, says: “Every time the Fair Work Commission makes a new ruling or interpretation, it adds another ‘wrinkle’ that large and small businesses need to be aware of and understand.”

Yet, he observes that providers often come to the market with “set and forget type” payroll technology, and that this has lulled businesses small and large into “a false sense of security”.

“With technology appearing to do everything, many businesses have almost abdicated their own internal responsibility to keep up with all the changes, and don’t pick the right partner to go on the journey with them and help them keep them up,” Haloulos says.

Andrew Rich, principal lawyer, industrial relations and employment law at Slater and Gordon, says there are many different reasons why employers wrongly pay their employees. “But broadly, my sense is that it’s a result of employers just not prioritising proper payment and ensuring they get it right,” he says.

“Companies ensure their tax affairs are right by getting a tax adviser in and not trying to do it themselves. It seems employers haven’t done the same thing in terms of their payroll obligations.

“Certainly, there is a degree of complexity in payroll, but it’s not complex in a way that there’s an excuse for not doing it right or for not paying the right amount of attention to it.”

Zeb Holmes, a solicitor at Harmers Workplace Lawyers, believes payroll difficulties can be greatly mitigated by seeking out appropriate pre-emptive advice and actively auditing payroll processes.

“It needs to be recognised that it’s far too easy to blame the complexity of the system,” he says. “In Australia, only about 20 per cent of people are covered by awards or are award-reliant. Further, employers will often overlook the ability to simplify payroll by utilising mechanisms that the legislation itself provides.

This includes, for example, the possibility of individual flexibility agreements, or enterprise agreements that cover all relevant staff and simplify payroll and the administrative burden on employers.”